Will A New Law Ensure The Death Of This Energy Sector?

It’s amazing how government often works the exact opposite of business.

And one example last week in the energy sector shows this out-of-stepness perfectly. In the Indonesian coal industry.

As I’ve discussed, the global coal business is facing a dire situation at the moment. With prices having fallen off a cliff, demand moderating from key markets like China, and production largely having continued to chug out at a brisk rate.

Coal miners have thus been moving to cut costs in order to stay alive. Major producer Anglo American recently said it may sell mines in Australia to raise funds. And this week Indonesian producer Garda Tujuh Buana said it is suspending coal output entirely until prices recover.

But at the same time as Indonesia’s miners are rationalizing, the country’s government is apparently looking for more cash. With plans on the books to raise royalties for the sector.

Bloomberg reported this week that officials at Indonesia’s Energy and Mineral Resources ministry have confirmed new laws coming for higher royalties. With the plan calling for a significant rise from current rates.

Low-calorie coals (less than 5,100 kcal) will now be subject to 7% royalties, up from a previous 3%. Medium-grade coal will jump to 9%, from 5%. And high-quality shipments with greater than 6,100 kcal will see rates soar to 13.5%, from 7%.

This is almost certainly a result of the general economy in the country slowing down, as key sectors like coal decelerate. With the royalty increases representing a last-ditch effort to milk more cash, and fill the gap.

But the timing is absolutely awful for the mining sector. Many operations are barely making a profit at today’s prices — and at up to 6.5% higher royalties, a number of mines will likely be pushed into the red.

This is of course, potentially good news for the global coal sector. Suggesting that output from Indonesia may fall soon — with the new royalties expected to become effective no later than April. After that date, watch for mine closures and supply contraction here.